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Chart pattern · Continuation patterns

Dead Cat Bounce

Dead Cat Bounce
Slope: falling Span: days to weeks

What it is

A sudden sharp drop, often with a gap after news. A partial bounce follows that looks like recovery. Then price returns and breaks the low of the drop.

Terms on this page: Price Gap · Volume · Structural Invalidation

Dead Cat Bounce: a chart with a worked exampleA worked example of the Dead Cat Bounce pattern over 70 sessions. The signal comes at the close of session 59, near $82. The invalidation is $98.SignalInvalidationTrailing stopSharp declineBounceLow of the drop$98$60$80Volume03570 sessions
Dead Cat Bounce: a chart with a worked exampleA worked example of the Dead Cat Bounce pattern over 70 sessions. The signal comes at the close of session 59, near $82. The invalidation is $98.SignalInvalidationTrailing stopSharp declineBounceLow of the drop$98$80Volume03570 sessions
  • Orange line invalidation
  • Hollow green candle closed above its open
  • Filled red candle closed below its open
A worked example that explains the rule, not a stock price · prices on the right axis, sessions under the volume bars

More detail

A bounce is known to be "dead" only after the low breaks. The idea is that bad news forces many to sell, then bargain hunters buy and price bounces. Then selling returns because the cause of the drop has not changed. The name comes from a common market expression for a short bounce after a big fall, not a real recovery.

Reading it stage by stage

  1. Decline A gap or a sharp session on heavy volume.
  2. Bounce Bargain hunters buy. Volume is weaker, and price does not recover the gap.
  3. Failure The bounce stops below the gap zone.
  4. Break A close below the low of the first drop. This is the signal.

Recognition rules

  • A sharp drop in one or two sessions, often with a gap.
  • A clear reason for the drop: earnings, forecasts or an event.
  • A partial bounce that does not recover the whole gap.
  • Volume in the bounce is lower than in the decline.
  • Confirmation is a close below the low of the first drop.

Measuring the target

There is no agreed measure for this pattern: a break of the low at $82 is the signal, and the position is managed with a stop that moves down with price. The invalidation level is the high of the bounce at $98. The distance between the break of the low and the high of the bounce is usually large. So the risk in the trade is large too. Many people overlook this when they see the gap. Someone who owns the stock gets more from the pattern than someone who wants to sell short. The bounce is a chance to review the decision to stay. A close below the low says the cause of the drop is still at work. The time between the bounce and the break can be long, so there is no set date for it.

Where it fools you

  • Calling every bounce after a drop a dead cat. Many bounces become real lows, and the name does not apply before the low breaks.
  • Selling in the middle of the bounce without a signal: the bounce can fill the whole gap and continue.
  • The gap itself can be good news for a different reading, so context starts with the reason for the drop.
  • Volatility in the first days after the gap is high, so option contracts on the stock are expensive in these days. Their premium loses value when price calms down.

Where to find it on the platform

  • Daily candles · free tool
    Daily candles for the platform's symbols, no sign-up, so you can spot the pattern yourself. The drawing tools are in the members' terminal.
  • Technical terminal · drawing tools Members only
    Open the daily timeframe for any symbol and draw the pattern yourself. Your drawing is saved per symbol in your browser, and the terminal does not name or detect the pattern.
    • ━ Level Low of the drop
    • ⇕ Measure Target equals pattern height
We do not detect chart patterns with a numeric rule: telling them apart takes judgment on the chart. Candlestick patterns with a numeric rule are detected daily by the candlestick pattern scanner.

Patterns from the same family

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Back to the chart pattern encyclopedia or Japanese candlestick patterns.